Key Takeaways:
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- You still have time to claim the ERC if you qualify
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- To be eligible, you need to have closed partially or fully because of government orders or your business lost gross receipts
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- Legislation such as the CARES Act, American Rescue Plan, and subsequent IRS notices provide updates for the ERC
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- It is no longer likely that the ERC will be extended, and it ended for most businesses on September 30, 2021
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- You still have time under the lookback period: claim the ERC within three years from the date you filed your original tax return
Your business may have suffered from the impact of COVID-19, and you may still be feeling the effects today. The government created several relief programs to help businesses recover, and you may still qualify. You can still apply for a retroactive retention credit against employee wages you paid during 2020 and 2021 by using something called the ERC lookback period.
It is possible that you were participating in the employee retention credit (ERC), also known as the ERTC, during 2021, and then the cancellation three months early meant you owed retention benefits back to the government. Perhaps you thought about applying for the ERC but had trouble understanding all the rules, regulations, and changes to the program, so you gave up.
There have been numerous changes to the program since the ERTC was introduced. Businesses that didn’t qualify right away may now be eligible, and you may be able to still claim your credit in 2023.
Never assume your payroll service or CPA found all the credits you are entitled to for COVID-19 relief. For the ERC, the government allows a three-year lookback at payroll and the ability to file retroactively.
Is the ERC taxable income? What is the ERC lookback rule? How long is the Form 941 lookback period? You may have a lot of questions. This guide explains what opportunities remain for the ERC and how you can take advantage of the ERTC lookback provision.
You Can Still Claim the Employee Retention Credit with the ERC Lookback Period Rule
Even though the ERC ended on September 30, 2021, for most businesses, you have an opportunity to determine your company’s eligibility and still apply retroactively. This is because of a three-year payroll lookback period option. That lookback period allows you to claim the credit on an amended Form 941.
The 2021 credit was 70% of up to $10,000 in wages, so an eligible employer may claim a maximum of $7,000 per quarter for each qualifying employee – this means there is a possible total claim of $21,000 per employee just for 2021. Refund amounts for 2020 were 50% of up to $10,000 in wages or a maximum of $5,000 per employee for the year.
| Year | Credit % | Maximum Wages | Maximum Claim per Quarter/Year per Employee | Possible Total Claim per Employee |
|---|---|---|---|---|
| 2020 | 50% | $10,000 | $5,000/year | $5,000 |
| 2021 | 70% | $10,000 | $7,000/quarter | $21,000 |
The financial benefits are substantial, especially because the ERC is a fully refundable credit. This means you may receive a refund higher than your payroll taxes. This provides the answer to the question of whether the ERC is taxable. The ERC is not taxable income.
Businesses initially had to include their ERC calculations on Form 941, the quarterly payroll tax return. Applying for the credit retroactively now requires filing an amendment, however—this is Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Eligible employers have three years from the date they filed their original Form 941 or two years from the date they paid the tax, whichever is later, to claim the ERC. You will need a separate Form 941-X for each quarter you’re claiming.
Eligibility Requirements For The Lookback Period
The ERC eligibility guidelines are straightforward. There are two initial ways to qualify. First, you must have experienced a government shutdown due to the COVID-19 pandemic in 2020 and/or 2021.
You can still qualify even if you didn’t experience a shutdown, however – as long as your business saw a 50% or more decline in gross receipts because of coronavirus in 2020 or 20% or more in 2021. You can determine your decline for a quarter by comparing it to the same quarter in 2019.
The next eligibility requirement is determining whether you are a large or small business. You must average 500 or fewer full-time employees to qualify as a small employer. If you qualify as a small business, you may be eligible to include all wages paid during that quarter.
Large employers can only claim wages paid to employees for not providing services. Note that the definition of a large employer was changed from initially being at least 100 full-time employees to at least 500 full-time employees.
When conducting your ERC analysis, exclude any wages that fall under the Paycheck Protection Program (PPP) forgiveness. You can still claim the ERC, however, even if you received a PPP loan during the pandemic.
Information to Gather Before Claiming the ERC During the Lookback Period
You still need to verify a few details, even if you believe you meet the above eligibility requirements. You will need to gather the following information, regardless of whether you’re making calculations yourself or applying through a professional service like ERC Today:
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- Quarterly revenue summary for 2019, 2020, and 2021
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- Quarterly payroll tax returns
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- Detailed report of employee wages by date paid
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- Summary of the lines of business (services, products, etc.)
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- Location of business operations and employees
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- Detailed report of wages paid to employees when not working due to COVID
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- Detailed report of wages paid under the PPP
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- Employee relationship for each employee to determine eligibility (for example, brother, sister, in-law, step-parent or sibling, etc.)
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- A detailed report of health insurance expenses paid for each employee
These details and documents will allow proper calculations to be made on whether your business qualifies for the ERC. It is crucial that you only use Form 941-X to claim the ERC if you actually qualify and can verify the wages used to make your calculations. You can always talk through your options with an ERC expert if you have questions.
What Is IRS Notice 2021-65?
IRS Notice 2021-65 made modifications to six prior notices and implemented changes to the Infrastructure Investment and Jobs Act. This notice provides relief for employers anticipating ERC credits for the fourth quarter of 2021.
Those fourth-quarter credits were eliminated for most businesses and are no longer available. Only recovery startup businesses can claim the last quarter of 2021.
These are those businesses that began operation after February 15, 2020, and have less than $1 million in average annual gross receipts. The remainder of eligible businesses can only claim the credit through September 30, 2021.
The IRS is waiving penalties if employers follow specific steps. Employers that made requests for advance payment of their fourth-quarter ERC and that now don’t qualify must now repay the excess advance payment by the employment tax return due date.
Employers reducing their employment tax deposits because of the ERC must stop this practice by December 20, 2021. Employers must report their tax liability resulting from the ERC termination, in addition to depositing unpaid amounts by the due date, on their employment tax return.
These rule changes can get confusing fast. It’s helpful to look at the background of this tax credit program to fully understand how the ERC got to this point and what it means for your business.
Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) § 2301 of 2020 allowed eligible employers to receive the aforementioned employee retention credit. The requirements include verifying that the employee qualifies under the plan based on both wages and health care plan expenses. The payroll period under this initial legislation was March 12, 2020, to December 31, 2020.
Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act)
The Relief Act § 206 made retroactive amendments and changes to § 2301 of the CARES Act for qualifying wages. The main change was an expansion of employer eligibility, allowing more employers to claim the credit.
Section 207 of the Relief Act extended the application for ERC to wages paid between January 1, 2021, to June 30, 2021, and modified calculations of the credit amount.
American Rescue Plan (ARP) of 2021
The American Rescue Plan § 9651 provides the ERC for wages paid between July 1, 2021, and December 31, 2021. Section 3134 added “recovery startup businesses” as eligible for receiving ERC on qualifying wages in the third and fourth quarters of 2021.
IRS Notice 2020-22, 2020-17, IRB 664, and More
Three notices on March 31, 2020, were meant to provide penalty relief under § 6656 for failure to deposit employment taxes. This is for employers qualifying for refundable tax credits under the Families First Coronavirus Response Act (Families First Act) and CARES Act.
Notice 2021-24 provides an extension to penalty relief for employers claiming credit under the ARP, including ERC. IRS Notice 2021-49 provides businesses with guidance on the ERC under § 313, clarifying regulations.
Notice TD 9953, 86 FR 50, 637
These notices came out on September 10, 2021. They set forth temporary regulations regarding the Recapture of Excess Employment Tax Credits under the American Rescue Plan Act of 2021. The regulations authorize assessing and collecting erroneous refunds of certain credits, including the ERC.
Infrastructure Act § 80604 Amendment
This amendment applies to wages paid from June 30, 2021, to October 1, 2021 – however, if the business is a recovery startup, the ending date is December 31, 2021. It also amends the recovery startup business definition, removing requirements that made recovery startups previously not eligible.
Will the ERC Come Back?
Congress revoked the final 2021 quarter of the ERC to raise additional revenue under the belief that the ERC was underutilized. Nonprofits and small businesses have been lobbying Congress for ERTC reinstatement. The basis of this argument is that reinstatement needs to be part of any new pandemic aid that comes out in the future.
Democratic senators were considering the need to put the ERC back in place. It was a challenge to get any additional legislation passed about the ERC, however, and as of 2023, there isn’t much hope that the employee retention credit will be extended or expanded.
Congress realizes the ongoing coronavirus variants make it difficult for small businesses to meet the goal of retaining employees. The ERC has helped significantly in remedying this problem.
How to Claim the ERC in 2023
Even though the government ended the ERC program in 2021 and has yet to extend it, you can still claim the credit retroactively if you haven’t yet but have determined that you are eligible for the 2020 and/or 2021 quarters. Here are six steps you need to take to claim the ERC in 2023:
1. Determine Your Eligibility for the Lookback Period
You must have experienced a significant decline in gross receipts or had your business partially or fully suspended due to government orders related to COVID-19 to be eligible for the ERC.
2. Identify Which Quarters You Qualify For
The employee retention credit is available for qualified wages paid between March 13, 2020, and September 30, 2021 (for most businesses). You can still claim the credit for each quarter that you qualify for.
3. Calculate Your Credit
The employee retention credit is equal to 50% of qualified wages paid per employee, up to a maximum of $5,000 per employee for the entire year of 2020, and 70% of wages paid, up to $7,000 per employee per quarter in 2021.
4. File Form 941-X
You must file Form 941-X for the applicable quarters if you want to apply for the employee retention credit retroactively. This form allows you to amend your previously filed Form 941.
5. Apply by the ERC Deadline
Remember that you have limited time to claim the ERC. Apply within three years from when you submitted the original Form 941 that you’re amending.
6. Wait for the IRS to Process Your Claim
Once you have submitted your Form 941-X and supporting documentation, you will need to wait for the IRS to process your claim. Processing times are currently backed up, according to the IRS, so you may experience a delay.
The employee retention credit is a complex tax credit, and you may want to consult with a tax professional to help you navigate the application process. This is especially true if you have only just realized you qualify and are trying to claim the ERC retroactively.
Get Your Retroactive Employee Retention Credit – with the ERC Lookback Opportunity
Analyzing and calculating the Employee Retention Credit is complicated and time-consuming. The IRS has more than 100 pages of rules pertaining to ERC. Mistakes in filing can lead to audits, interest, and penalties.
Help ensure you will receive all ERC you qualify for by contacting ERC Today. We can assist you in determining whether you meet employer and employee qualifications. We will answer your questions and help you apply for retroactive credit based on the lookback period rules. Get in touch with us to learn more.
